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Introduction to

upp y a n anagemen

David Simchi-Levi

Professor of Engineering Systems

Massachusetts Institute of Technology

Sources:

Plants vendors

portsRegional warehouses:

Stocking points

Field warehouses:

Stocking points

Customers demand

centers sinks

Transportation costsTransportation costs

Inventory & warehousing

costs

Inventory & warehousing

costs

Production/purchase

costs

Supply

Image by MIT OpenCourseWare.

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Supply Chain Management• Definition:

Supply Chain Management is primarily concernedwith the efficient integration of suppliers, factories,warehouses and stores so that merchandise isproduced and distributed in the right quantities, tothe right locations and at the right time, and so as tominimize total system cost subject to satisfying

.

• Notice:

– Who is involved

– Cost and Service Level

– It is all about integration©Copyright 2003 D. Simchi-Levi

Conflicting Objectives in the SupplyChain

.• Stable volume requirements• Flexible delivery time• Little variation in mix• Large quantities

2. Manufacturin• Long run production• High quality• High productivity• Low production cost

©Copyright 2003 D. Simchi-Levi

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O r d e r S i z e

Conflicting Objectives in the Supply

Chain

.• Low inventory• Reduced transportation costs• Quick replenishment capability

4. Customers• Short order lead time• High in stock

• Enormous variety of products• Low prices


The Dynamics of the Supply Chain

Customer

Demand

Retailer OrdersDistributor Orders

Production Plan

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998


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O r d e r S i z e

The Dynamics of the Supply Chain

Customer

Demand

Production Plan

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998


Today’s Supply Chain Challenges

•

Global supply chain with long lead times

• Rising and shifting customer expectations

•

•

Increase in logistics costs

8

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Increase in Logistics Costs

13

14

US Logistics Costs as Percent of GDP

8

9

10

11

12

15% increase

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

• Rising energy prices

•

Rail capacity pressure

• Truck driver shortage

• Security requirements 9

Total US Logistics Costs 1984 to 2007 ($ Billions)

1400

1600

Total US Logistics Costs in $MMs

52%

Total Cost

600

800

1000

1200

Transportation

47%

62%Inventory

0

200

400

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Inv Carrying Transportation Admin Total

Source: 19th Annu al Logi st ics Repor t10

Admin

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Today’s Supply Chain Challenges

•

Global supply chain with long lead times

• Rising and shifting customer expectations

•

•

Increase in logistics costs

• Importance of sustainability

•

Unprecedented Volatili ty

11

Unprecedented Volatility

Number of days the price1990: 38 days

2008: 39 days

Year

In 2008 the price of oil changed 5% or more from its previous close

on 39 days making i t the most volatile year since 1990.Source: NYT

12

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Supply Chain: The Magnitude

• t s est mate t at t e grocery n ustry cousave $30 billion (10% of operating cost) byusing effective logistics strategies.

– A typical box of cereal spends 104 days gettingfrom factory to supermarket.

– yp ca new car spen s ays rave ng romthe factory to the dealership.


Supply Chain: The Magnitude(continued)

• Compaq computer estimates it lost $500 million to $1billion in sales in 1995 because its laptops and desktopswere not available when and where customers wereready to buy them.

• Boeing Aircraft, one of America’s leading capital goodsproducers, was forced to announce writedowns of $2.6

on n c o er . The reason? “Raw material shortages, internal and

supplier parts shortages…”. (Wall Street Journal, Oct.23, 1997)


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Supply Chain: The Potential

• Procter & Gamble estimates that it saved retailcustomers $65 million through logistics gains over thepast 18 months.

“According to P&G, the essence of its approach lies in

…. jointly creating business plans to eliminate the

source of wasteful practices across the entire supplychain”.(Journal of Business Strategy, Oct./Nov. 1997)


Supply Chain: The Potential

• Dell Computer has outperformed the competitionin terms of shareholder value growth over theeight years period, 1988-1996, by over 3,000%(see Anderson and Lee, 1999) using

- Direct business model

- Build-to-order strategy.


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Supply Chain: The Potential• In 10 ears Wal-Mart transformed itself

by changing its logistics system. It hasthe highest sales per square foot,inventory turnover and operating profitof any discount retailer.


Supply Chain: The Complexity

• Production:

– Produces chips in six different locations: four in the US,

one in Britain and one in Israel

– Chips are shipped to seven assembly locations in

Southeast Asia.

• Distribution

– over the world

– 20,000 different routes

– 12 different airlines are involved

– 95% of the products are delivered within 45 days

– 5% are delivered within 90 days.


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Supply Chain Challenges

• c ev ng o a p m za on

– Conflicting Objectives

– Complex network of facilities

– System Variations over time

Image by MIT OpenCourseWar

Procurement Planning Manufacturing Planning Distribution Planning Demand Planning

Procurement Planning Manufacturing Planning Distribution Planning Demand Planning

Sequential Optimization

Global Optimization

Supply Contracts / Collaboration / Information Systems and DSS

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Supply Chain Challenges

– Conflicting Objectives

– Complex network of facilities

– System Variations over time

• Managing Uncertainty – Matching Supply and Demand

– Demand is not the only source ofuncertainty


The Enterprise

Fulfillment and Development Supply Chains

•Product Architecture

•

D ev el o

Source

•Early Supplier Involvement

•Strategic Partnerships

•Suppliers Selection

•Supply Contracts

pm en t S u p pl y C h ai n

Supply Produce Distribute Sell

Fulfillment Supply Chain

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Fulfillment and Development Supply Chain

• Industry clock speed

Innovative vs. functional

products

• Core competencies

Make vs. bu.

• Product design

Modular vs. integral

D e v e l o p m e n t S u p p l y C h a i n Supply

Plan/Design•Product architecture•

Make/buy•Early supplier involvement

•Strate ic artnershi s

Produce Distribute

Source•Supplier selection•Supply contracts

Fulfillment Supply Chain

Sell

• Uncertainty and variability Demand and supply

• Lead time Offshoring vs. onshoring

• Economies of scale Production and transportation

What’s New in Logistics?

• Global competition

• Shorter product life cycle

• New, low-cost distribution channels

• More powerful well-informed customers

• Internet and E-Business strategies


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Significant Increase in Outsourcing

54%

28%

60%

57%

34%30%

40%

50%

60%

70%

%

0%

10%

20%22%

24%

16% Machinary

Computer and telecom

Food manufacturing

Telecom services

1993 1996


New Concepts

-

• Direct-to-Consumer

• Strategic alliances

• Manufacturing postponement

• Dynamic Pricing

• E-Procurement


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MIT OpenCourseWarehttp://ocw.mit.edu

ESD.273J / 1.270J Logistics and Supply Chain Management

Fall 2009

For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.

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MITESD_273JF09_lec01